Archives For Tax Planning

I saw this article on the IBD website about the future of the Federal Income Tax. I’m not looking forward to this future:

“The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket—25%—will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.”

What does that mean, dollar-wise? Let’s take a look at a family with $50,000 in taxable income. Not adjusting the brackets for inflation but adjusting them for the new percentages, here is what how they might look from 2009 to 2011:

So this family is looking at paying $835 more just in this part of their income tax bill—and that’s not counting adjustments for child tax credits or other adjustments.

According to the article, the marriage penalty will also make a comeback. Capital gains taxes will go up to 20% (from the current 15% rate). Taxes on dividends will also go back up to a maximum of 39.6%.

There will also be a new 3.8% medicare tax on capital gains for those with incomes over $250,000 (married filing jointly—$200,000 for single filers).

Complicating all of this is the alternative minimum tax, which if it isn’t “fixed,” will trap 28 million families.

The estate tax will also make a comeback in 2010.

The article lists several other taxes too. Combine all these with state and local taxes, which are most likely to go up since states and municipalities are broke, and we’re looking a spending lots more in taxes.

Time to sock away the maximum you can into your 401(k) and Roth IRAs (no tax benefit up front but can help out years down the road during retirement).

I’ve been doing a little reading lately about the taxes. As we all know, the Bush tax cuts expire after 2010. There is talk about leaving the tax cuts alone for the lower brackets but bringing back the 36% and 39.6% tax brackets for taxable incomes of $250,000 and above. Based on that information, I took the 2009 federal income tax brackets for married filing jointly (MFJ), which look like this:

Source: Wall Street Journal

I took those numbers, added the new tax brackets, added a 3% inflation adjustment (for two years) to the brackets, and this is what I came up with:

2010 Federal Income Tax Brackets (PURE SPECULATION)

In addition to the new tax brackets, there’s also talk of…

• a surtax of 1% for families who make over $250,000, 2% for families who make over $500,000, and 3% for incomes over $1,000,000. These rates could double in 2013.

• limiting itemized deductions to 28% for incomes over $250,000.

• the possibility of the 1.45% medicare tax being added to dividends.

Did I miss anything? If so, leave a comment and I’ll add it to the list of possible changes.

Although these numbers are pure speculation, I did base them on things I have read (mostly the Wall Street Journal).

Philip, a long-time AFM reader, sent me this email:

I was wondering what your opinion is on whether you think that the availability of simplified tax software has left many people knowing even less about their taxes than they used to? I know recently Nickel had a post about taxes and lots of people seemed to think that if they were getting a tax return then they did not pay any taxes! Lots of people don’t understand that a raise will not put them into a larger bracket and they will take home less money—the graduated tax system confuses them.

I guess I just think if these people had to fill out some forms and not just copy numbers they would understand more of what is happening with their money and how much they are paying in taxes.

I used tax software to calculate my return but I checked the numbers and read the tax return that was prepared by the software to make sure the numbers did what I expected.


First off, I LOVE my tax software!

Second, I don’t think it matters. People who don’t understand taxes wouldn’t understand them any better if they didn’t have software. They would probably just go to a tax professional.

It’s a shame that people don’t pay more attention to their finances but they don’t. It’s just a fact of life.

I would like to see a tutorial included in the software package that would explain the tax system to its users. Even then, I’m not sure it would do any good. Most people just want to be done with it.

What are your thoughts?

Here’s a quick look at the 2009 Federal Income Tax Brackets along with a comparison to 2008. Not a lot of changes.

Source: Wall Street Journal

Source: Wall Street Journal

The standard deduction will increase to $11,400 from $10,900 for joint filers ($5,700 from $5,450 for single filers). The personal exemption for 2009 is $3,650* but is phased out at higher income levels.

The Social Security wage base moved up to $106,800 from $102,000&#151meaning, any income over $106,800 is not taxed for Social Security. It also means that the maximum a person will pay into Social Security is now $6,622.

*According to the PricewaterhouseCoopers 2009 Guide to Tax and Financial Planning

As a blogger, I get lots of article submissions and press releases sent to me on a daily basis. Normally, I ignore them but I thought this one was worth sharing. I received this last week before the Super Bowl but am just now getting around to posting it.

The IRS Knows What Happens in Vegas…

A Tax Tip from the Experts at J.K. Lasser

Thinking of placing a bet on your favorite Super Bowl contender? Keep in mind, the Internal Revenue Code is unkind to winners — and it doesn’t much like losers, either. If you win you must report your winnings. You can offset the tax bite by claiming your gambling losses, but that isn’t as easy as it sounds.

How do they know what you’ve won?

The casinos tell the IRS and sometimes withhold up to 28%.

Rules for Tax Reports and Withholdings on Winnings

  • Slot machines and bingo: Payouts of $1,200 or more are reported to the IRS, but there is no withholding taken out.
  • Keno: Similar to slot machines, but the amount won must be at least $1,500.
  • State lotteries and sweepstakes: Withholding is taken out of all winnings of more than $5,000.
  • Parimutuel pools, including horse and dog races: Subject to withholding, but only if the winnings are both more than $5,000 and at least 300 times as large as the amount bet.
  • Big winners are reported to the IRS on a special Form W-2G.
  • If winnings are to be split, as with a lottery pool, winners are reported on a Form 5754.

Pooling money to buy lottery tickets is common among employees and friends. But whether there are two or 200 in the pool, there is going to be only one winning ticket, and somebody has to turn it in. If you are that someone, make sure you fill out a Form 5754. If your share of a $5 million prize is $1 million, you do not want to be stuck with paying income tax on the entire $5 million.

Is there anything a winning player can do to lower the bite of the income tax? And what about those who gamble and lose? The law does allow players to take gambling losses off their taxes, but only up to the amounts of their winnings.

  • You may deduct gambling losses only if you itemize deductions.
  • Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A.
  • The amount of losses you deduct may not be more than the amount of gambling income you have reported on your return.
  • It is important to keep an accurate diary or similar record of your gambling winnings and losses.
  • To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

For more on what can work for you, against you, and how to do better this year, see JK Lasser’s Your Income Tax2008 (Affiliate Link) and the Supplement at .

Here’s a look at the expected Federal Income Tax brackets for 2008. The official brackets from the IRS won’t be available until later this year. I found these numbers in an article in today’s Wall Street Journal, which has the following three individuals listed as the source for their information:

William Massey, RIA tax analyst at Thomson Tax & Accounting
George Jones, CCH
James C. Young, Professor at Northern Illinois University

The brackets:

2008 Federal Income Tax Brackets (Married Filing Jointly)

2008 Federal Income Tax Brackets (Most Single Filers)

In addition, the basic standard deduction is supposed to increase to $10,900 (up $200 from 2007) for married filing jointly and for most single filers it will increase to $5,450 (up $100 from 2007). The personal exemption will increase to $3,500, which is a $100 increase over 2007.

A lot of this won’t mean diddly to a lot of filers if congress doesn’t do something with the AMT, which is expected to impact 25 million people in 2008 if something isn’t done. OUCH! Long-time readers know my distaste for the AMT.

For those who are interested, here’s some additional tax posts I have done that you might find helpful:

Tax Stuff You Need to Keep In Your Records

50 of the Most Easily Overlooked Tax Deductions

2007 Federal Income Tax Brackets

401(k) Contribution Limits for 2007

What is Modified Adjusted Gross Income?

Tax Links: Online Tax Resources

How to Calculate Tax-Equivalent Yield

Social Security Wage Base for 2007

Here’s an email I received from a reader:

I’ve been a passive reader of your blogs for quite sometime and i’ve a learnt a lot about finance.

I am Indian student in F1 visa status. I recently got a job and I plan to work for around 5 yrs in H1B status before I go back to India. I don’t want to settle down in the US until my retirement. My company offers 401(k). For the first 3% they match every dollar, the next 2% they match 50 cents on the dollar. I don’t want to lose the free money from my employer. Is it worth investing in 401(k) even after knowing that I will be taking the money before retirement and will be paying the tax and penalty when I withdraw it? I want to know if I could profit, even after taxes and penalty, from the free money that my employer matches. My gross salary is 78k and I’m in the 28% tax bracket.


Interesting question and I like a challenge so I decided to take it on. Now, since I’m not getting paid for this, DON’T take this example as advice. It’s merely an exercise to see what could happen in a situation like this.

Here’s what I came up with:

First off, I know nothing about F1 status or H1B status and have no idea whether or not any of this would have an impact on the outcome of this situation. Also, I have ignored Social Security and Medicare in this situation. Here are some other assumptions I made:

  • The $78,000 salary remains the same for the 5 years.
  • The 401(k) grows at 8% per year. To compute this I simply took the year’s ending balance and grew it at 8% and then added the next year’s contributions to it. It’s not precise but it will work for this example.
  • I used 2007’s tax brackets, personal expemption and standard deduction throughout the example.
  • In year 6 I assumed his only income would come from the termination of the 401(k). If he had additional income that year, it could have a huge impact on his tax situation.

401(k) Early Withdrawal Example

401(k) Early Withdrawal Example

401(k) Early Withdrawal Example

401(k) Early Withdrawal Example

401(k) Early Withdrawal Example

So that represents his five years of working. Now let’s see what could happen when he withdraws the money. Remember that an early withdrawal from a 401(k) is taxed as income AND is assessed a 10% penalty (except in certain situations that don’t apply here).

401(k) Early Withdrawal Example

So, according to my math, he will contribute $19,500 (his personal contribution not including company match) into the plan over 5 years and get to keep $33,758 when he terminates the plan and pays the taxes and penalty on the withdrawal. It would be better to keep the plan as is and let the $41,184 grow but I’m not sure if this option is open to him. Also, keep in mind that the plan provider may withhold 20% of the balance, which he will get back the difference once he files his taxes.

Dreamer, I hope I answered your question. Now, take this with a grain of salt and go see your CPA.